With President Obama and congressional leaders entering a high-stakes meeting Wednesday, a vote in the US House of Representatives has laid down an important marker: Republicans won't raise the national debt limit without conditions attached to curb future spending.
On Tuesday, the Republican-led House voted down a measure that would have approved a new round of federal borrowing without such conditions.
Public opinion polls suggest that most Americans feel the same way – exhibiting an aversion to simply raising the US debt limit one more time with no strings attached.
That makes it more likely that Washington will put some sort of restraints on future federal budgets. However, chances are fading for reaching a larger "grand bargain" on fiscal reform – such as a deal that includes tax-revenue increases or entitlement reforms – because both parties have maneuvered into corners that give them little room for maneuvering.
"We know there's not going to be a Medicare and Medicaid deal," because of sharp partisan differences, says Robert Shapiro, a policy consultant who was an economic official during the Clinton administration. "Similarly on taxes, there's no incentive for Republicans, given the current narrative they're trying to establish, to make any concessions."
Republican lawmakers are generally opposed to any net increase in government tax revenue. By contrast, Democrats on the Hill argue that fiscal reforms should ultimately involve reforms that keep tax rates low but also raise additional federal revenue, by limiting things like credits and deductions in the tax code.
Given this political lay of the land, it's unlikely that negotiations to raise the debt ceiling will yeild anything like the $4 trillion in deficit reduction, spread over 10 years, proposed last year by President Obama's bipartisan fiscal commission, say policy analysts. That package included new tax revenue and reforms of health care and Social Security programs.
On the other side of the spectrum, analysts say, it's also hard to imagine the two sides failing to reach any deal at all. Treasury Secretary Timothy Geithner has warned that if Congress fails to approve a boost in the debt ceiling by early August, the federal government will find it very difficult to maintain normal operations.
Financial markets could also become worried about the ability of the US government to deal responsibly with its fiscal challenges.
The US has already reached its current debt limit of about $14.3 trillion, as of last month, and the Treasury is taking extraordinary measures to keep federal programs running without new borrowing.
Economists don't all agree that now is the time for a big effort to curb the government-debt habit.
Some, including Mr. Shapiro of the consulting firm Sonecon, argue that spending cuts or tax hikes at this time could threaten a fragile economic recovery. He notes that bond investors, far from showing signs of panic over US debt levels, still appear happy to hold US Treasury bonds.
Others argue that, although the Treasury can borrow at low interest rates now, the US can't count on staying in good favor with bond investors for too much longer. They say that waiting to consider fiscal reforms until after the 2012 election, for example, could be risky.
The credit-rating firm Standard & Poor's recently warned that it may need to downgrade its safety rating for US debts within two years.
What now looks probable is that Congress and the White House will agree on some ways to curb spending – perhaps with automatic triggers if certain targets for federal deficits aren't met – while leaving the larger debate over fiscal policy for the 2012 election.
It's always possible that this forecast could prove wrong. Some lawmakers in both parties have been working hard to forge a broad bipartisan plan similar to that of the fiscal commission.
But the broad emphasis within both parties is on some hard-and-fast positions, with Republicans against tax hikes and Democrats against GOP-style reforms of Medicare.
In a recent poll by the Pew Research Center, 48 percent of American adults said that regarding the debt-limit issue, their big concern is that raising the ceiling would lead to higher federal spending and bigger public debts. A smaller share, 35 percent, said their bigger concern is that a failure to raise the debt limit could push the government toward default and harm the economy.